Posted by Marc Hodak on August 9, 2010 under Executive compensation, Revealed preference, Scandal | 
CEO pay is generally discussed and debated from the point of view of more typical kinds of employees, from minimum wage teens to well-salaried executives, who work for what seem like arbitrary sums offered by frugal or venal owners, or their sometimes clueless representatives on the board. At this level of the discussion, one loses a key distinction about pay in a market economy, i.e., that one should be paid about what they’re worth. So, a relevant question in this debate that is never asked: What is a CEO worth?
Mark Hurd’s sudden, surprise resignation at HP offers a rare hint to the answer; in after-hours trading shortly after the announcement of his dismissal, HP’s stock declined by over 8 percent.
Ladies and gentlemen, that’s over $9 billion dollars in market cap.
So, while various pundits might claim that every CEO is replaceable, the question remains: at what cost? The answer isn’t found in the much vaunted proxy disclosures on executive compensation.
That $9 billion figure is a discounted future cash flow assessment of Mr. Hurd’s value. In other words, in the apolitical judgment of equity investors, the only people with the incentive to make this collective judgment correctly, the company would have been better off paying about $2 billion a year for the next five or six years to keep Mr. Hurd than to lose him.
In fairness to the board, the Mr. Hurd they let go, the man who broke the HP ethics code he had done so much to champion, was not quite the Mr. Hurd the investors thought they had before the Friday announcement. There was a legitimate concern that the expense-fudging Mr. Hurd could no longer govern with the same authority he had before this unfortunate news came out. But that’s not the point here.
The point is that the buttoned-down guy atop his Silicon Valley perch that HP’s investors thought they had was worth far more than the mere tens of millions that the media (check out the comments) and good governance types have regularly derided.
Update: Stephen Bainbridge weighs in. Larry Ribstein offers his take.
Posted by Marc Hodak on July 19, 2010 under Politics, Scandal |
Prof. Larry Ribstein on the Goldman ‘Abacus’ settlement. He predicts that the end result will be confusion about what big banks must disclose:
[W]hat lesson should Wall Street take away from this case? What, exactly, does a bank in Goldman’s position have to disclose to a customer? The identity of another customer on the other side, as the complaint suggests? Only when that customer is somebody like Paulson. What does that mean? Only if the customer has selected the portfolio? What does that mean? Many deals are put together with buyers in mind. Suppose ACA (the collateral manager) assembles the portfolio here with Paulson in mind, and then Paulson says, “that’s for me. Now I’ll invest.” Is this more “material” than having Paulson take the initiative? Suppose they collaborate in putting the portfolio together?
Get ready for even more fine print in our ever less readable disclosure regime.
On the other hand, why bother. If the government targets you, no amount of disclosure will save you.
And, yes, Barry, Larry is a lawyer.
Posted by Marc Hodak on May 10, 2010 under Governance, Scandal |
No, I’m not referring to TARP. The bailout of America’s banks was counteracting what could credibly be considered a liquidity crisis. The Europeans are providing the same medicine for a very different ailment:
The European Union agreed on an audacious €750 billion ($955 billion) bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide…
Immediately after the announcement, the European Central Bank said it is ready to buy euro-zone government and private bonds “to ensure depth and liquidity” in markets.
A liquidity crisis is when private banks generally refuse to lend money to anyone regardless of credit because they’re afraid that they might get caught short on their own cash needs. When private banks refuse to give more money to a spendthrift borrower, that’s prudent lending practice. When a collection of sovereign nations backs the loans of a spendthrift nation (especially knowing that they are inviting other spendthrift nations to continue their indulgence), they are simply shifting risk from private banks onto taxpayers. In this context, the soaring stock market we’re seeing in response to this shift is entirely understandable. But it would be paralleled by a similar decline in the value of taxpaying households, if that were being tracked in any kind of transparent market, since that is where this value is unarguably coming from.
That’s bad enough. The real problem is with how the EU is proposing to execute this massive value shift:
The money would be available to rescue euro-zone economies that get into financial troubles. The plan would consist of €440 billion of loans from euro-zone governments, €60 billion from an EU emergency fund and €250 billion from the International Monetary Fund.
Those €440 billion of loans would be borrowed through a debt facility guaranteed by the euro states via a special purpose vehicle (SPV). That’s like a company borrowing enough money to bet the whole firm via an SPV backed by its own shares. Where have we seen this before? If you’ve taken my History of Scandal course, would have guessed it. It’s like having the house double-down on failure.
Posted by Marc Hodak on April 21, 2010 under Politics, Scandal |
Few mechanisms have a greater impact on democratic governance than gerrymandering. Having incumbent politicians redraw districts entrenches them to the point that their reelection rate exceeds 95 percent. To paraphrase Yakov Smirnoff, in gerrymandered districts the voters don’t choose their representatives; the representatives choose the voters.
Gerrymandering enhances the power of political parties since all of the action is in the primaries, and the general election is a forgone conclusion. Many districts throughout the country have not changed party hands in decades. Thus, any challenges to gerrymandering have been briskly opposed by the parties even more than by the incumbents. In fact, the more talented politicians, the ones who could win in competitive elections, would likely benefit from reform since it would bring them out from under the thumb of their party bosses.
It’s hard to imagine a circumstance where the parties that control the redistricting process would agree to reforms that would reduce their power. But such a circumstance appears to be taking shape in New York. New York’s legislature is arguably the most dysfunctional in the nation. It is legendary not only for its brazen corruption, but for the open institutionalization of this corruption. After a string of scandals, the door may now be open to a reform movement that is attacking this corruption at its root by proposing to eliminate gerrymandering.
A coalition of brand-name New York politicians and good-government groups are getting every gubernatorial candidate to promise, in writing, that they will only sign off on a redistricting plan drawn up by a non-partisan commission. Whether or not the elected governor will actually veto anything less than that remains to be seen. Whether the governor’s veto of anything less will stand in a gerrymandered legislature remains to be seen. One has reason to be hopeful on the first question. The leading candidate for governor is Andrew Cuomo, despite the fact that he hasn’t officially announced his candidacy. Andrew’s father, former governor Mario Cuomo, is one of the leaders of the reform campaign. After all, it’s no great honor to be lord of a cesspool.
Posted by Marc Hodak on January 26, 2010 under Executive compensation, Politics, Scandal |
Last November, the Government Accountability Office released a report titled “PRIVATE PENSIONS: Sponsors of 10 Underfunded Plans Paid Executives Approximately $350 Million in Compensation Shortly Before Termination.” At the time, I was wondering: Gee, how did they pick those ten companies?
Not really. Anyone familiar with politics knows exactly what the criteria was–it was blazoned on the title of the report. The more interesting question is: What exactly is the link between unfunded pensions and executive pay that the government would consider it worth highlighting in a few hundred pounds of wasted paper?
It’s a weak link. Benefits consultant Michael Barry snaps it with some hard sense:
Obviously, out in the political atmosphere, these two things—PBGC liability and executive compensation—are connected somehow, but is there a logic to that connection?
Certainly, you’ve got to pay an executive something, and who is to say that in these circumstances this $350 million wasn’t the right amount? It’s clear that there are, anecdotally, instances that could only be called grotesque abuse. Also without doubt, there are companies out there (perhaps not these 10, which apparently all went bankrupt) with executives that are underpaid. In real life, if you want to win, you’re going to have to pay for talent.
Moreover, why exactly is executive compensation the PBGC’s problem? Couldn’t you make the same argument about corporate charitable giving? Every dollar of matching grants that these companies paid the United Way could have gone to fund the pension plan. Why pick on executives? Why not pick on the company day-care center?
Or, why not pick on regular employees? Surely there are some rank-and-file employees out there who are overpaid. According to The Wall Street Journal, the UAW jobs bank program cost U.S. automakers $1.5 billion in one year—2006. These were “employees” getting paid not to work.
Of course, there may be perfectly reasonable reasons for giving to the United Way, or providing a day-care center, or providing a jobs bank. There also may be perfectly reasonable reasons for paying executives managing companies through difficult times big salaries and bonuses. Or there may not. However, the government—is there any money being wasted on government employees I wonder?—is in no position to tell which is which.
That last point bears repeating. What standard does an outsider use to determine if a company is spending too much or too little on anything, especially something as difficult to value as senior talent?
Barry’s conclusion is not something we see in the mainstream media:
The point being—if it’s not obvious—that there is no necessary link between executive pay and unfunded benefits. The idea that there is, is simply an appeal to envy—which is, you know, a base instinct. (Some of us actually think it’s a sin.)
And some of us think envy is every bit as bad a sin as greed–much worse if it has state force behind it.
Posted by Marc Hodak on January 25, 2010 under Irrationality, Politics, Scandal |
So, you offered your investment managers an extra 50 cents for every $1,000 they make you as an incentive to better performance, i.e., more money for you. Then you got the best performing investment management in the whole industry. They earned you an extra $6,000, for which they are entitled to a bonus of $3. So, now you:
A) Increase the incentive to 60 cents–maybe the extra incentive will motivate even better performance going forward;
B) Pat your managers on the back, and keep the existing incentive in place. No need to get greedy;
C) Ridicule your management for being paid a BONUS, calling it “unconscionable,” try to take away what they earned, and cancel the whole incentive program, and their cost-of-living increases to boot.
The state of Missouri chose C.
The title of this post is attributed to Gary Findlay, head of the investment management team that had performed so well, only to be berated for it by his ignorant, spineless bosses.
Addendum: My wife considered the last comment unusually harsh for a sober blog. I am willing to admit that I overstated my critique of Findlay’s bosses. He has at least one who is not ignorant or spineless.
“By any objective standard, MOSERS is the best fund in the country,” said Senator Jason Crowell, a Cape Girardeau Republican who cast the lone dissenting board vote, according to the AP. He said the board should not change its policy based on “newspaper articles and political speeches,” and said taxpayers could ultimately lose money if the system’s rate of return fell because talented staffers left.
Thanks, Sen. Crowell, for standing up for reason against the thankless mob.
Posted by Marc Hodak on November 12, 2009 under Reporting on pay, Scandal |
But the verdict was not at all what the prosecutors were looking forward to when they tried a pair of Bear Stearns traders in the press, using what we now know to have been highly selective leaks. Once the jury saw the leaked material in context, in a forum that consisted of more than soundbites and press outrage, they came to their own conclusion:
In the indictment, the prosecution quoted from a note Mr. Tannin sent in April 2007 from his personal Gmail account to Mr. Cioffi’s wife. The government made much of the fact that Mr. Tannin chose not to send it to Mr. Cioffi himself or from his Bear Stearns’ e-mail account, suggesting he was trying to hide something. “The subprime market looks pretty damn ugly,” Mr. Tannin wrote, adding that if a recent financial report was correct, “I think we should close the funds now …. The entire subprime market is toast.”
But the jury eventually saw the entire message, in which Mr. Tannin ruminated at length about various courses of action and seemed to be striving to make the soundest financial choice. In other words, it was just what you would hope your fund manager would be worrying about in a precarious time. In the end, he concluded he was feeling “pretty damn good” about what was happening at the funds and that “I’ve done the best possible job that I could have done.” Any wonder the jurors came away with reasonable doubt?
The Bear Stearns executives are smiling now, but that’s what one does when the authorities threaten to take your life away, and you suddenly get it back. The jury made it clear this case was not close:
“They were scapegoats for Wall Street.”
“The entire market crashed,” one juror explained. “You can’t blame that on two people.”
But you can try if you’re a young prosecutor with the press, public, and political bosses cheering you on. And unlike these traders who lost their jobs, their firms, and much of their personal fortunes on their gamble, the prosecutors lost nothing personally on their gamble. Like the traders, though, the prosecutors did lose millions of dollars of other people’s money–ours, the taxpayers.
And even now, most commenters are assuming that this an unfortunate outcome, that the prosecution was merely incompetent rather than opportunistic.
Posted by Marc Hodak on November 8, 2009 under Politics, Scandal |
It should, according to the logrolling that got the vote of the lone Republican, freshman congressman Rep. Anh “Joseph” Cao:
Mr. Cao wants the Department of Homeland Security to forgive $1.27 billion in disaster loans in the wake of Hurricane Katrina; officials said they would try… Mr. Cao said in a statement that he won a commitment from Mr. Obama to address issues involving Louisiana hospitals and the disaster-loan forgiveness.
There may be good reason to forgive disaster loans to New Orleans residents or businesses. But doing so in exchange for committing the nation in a decisive step toward nationalized health care seems like a weak and profoundly cynical bargain, not to mention naive.
Posted by Marc Hodak on August 19, 2009 under Scandal |
Ex-Brocade CEO Greg Reyes was the example that prosecutors wanted to make out of a greedy CEO backdater, i.e., someone who schemed to inflate his compensation in stock options. The prosecutors surveyed the field for the perfect poster child for their prosecutorial campaign, the perfect trophy for their case. They passed over Steve Jobs, and settled on Greg Reyes.
The first problem they had to overcome was that Reyes, unlike Jobs, didn’t agree to the backdating of his own options–only those of certain people who worked for him. Never mind that he didn’t personally benefit from the backdating; the prosecutors wanted their conviction.
The next problem was that Reyes claimed he didn’t know that the disclosure he signed off on was improper. Backdating is, in fact, perfectly legal as long as it’s properly disclosed; then it’s just an in-the-money option, which is like an at-the-money option plus cash, both of which are commonplace (as were backdated options in Silicon Valley public companies of that time). But never mind that he didn’t know his firm’s disclosure was improper; the prosecutors wanted their conviction.
The next problem was that the prosecutors knew Reyes didn’t know the illegality of his actions, and they held back that evidence from the jury. That’s what bugged out the eyes of Ninth Circuit when they overturned the conviction.
The record demonstrates that the prosecution argued to the jury material facts that the prosecution knew were false, or at the very least had strong reason to doubt…
Deliberate false statements by those privileged to represent the United States harm the trial process and the integrity of our prosecutorial system. We do not lightly tolerate a prosecutor asserting as a fact to the jury something known to be untrue or, at the very least, that the prosecution had very strong reason to doubt.
I’m grappling with what the Court meant by “not lightly tolerate.” If a CEO fails to disclose an otherwise legal award of options to his employees, we should not tolerate that by threatening his liberty and property to the tune of a 21-month jail sentence and $15 million fine. If a prosecutor lies to a jury in order to deprive a man of 21 months of his freedom and $15 million of his cash, we should not tolerate that by…telling him it was a bad thing to do? Help me out here.
Larry Ribstein offer his usual, insightful coverage
Posted by Marc Hodak on August 8, 2009 under Scandal, Unintended consequences |
Probably not. No one knows which of the many elements contributing to the meltdown of last September were necessary or sufficient to be labeled a cause, but Larry Ribstein connects the dots in an intriguing way.
Treasury Secretary Paulson was obviously willing to let Lehman go down. But he saved AIG in order to “mitigate broader disruptions” in the economy. AIG was simply too big or too connected to fail, and their book of credit default swaps was the focus of Paulson’s concern.
So, why did their CDS exposure get so completely out of hand? Larry refers to a piece Michael Lewis had written about AIG:
Lewis blames everything on Joe Cassano, head of AIG Financial Products, whom Lewis dubs “the man who crashed the world.” According to Lewis, Cassano was not a financial wizard – just a back office guy with “a real talent for bullying people who doubted him.” He became ascendant when the man who put him in power, and who could control him (Hank Greenberg), was forced to resign by Eliot Spitzer (so, hey, let’s blame all this on Spitzer).
And so he does, first by referring to a WSJ item:
More than four years later, the federal government has decided that it cannot even make a civil case for fraud against Mr. Greenberg, never mind a criminal one. The SEC has essentially settled with Mr. Greenberg on the charge that he was the CEO at the time that “material misstatements” in earnings occurred.
Yet even if one accepts the SEC’s view of events, it may be a stretch to call them material, as they add up to less than 1% of AIG’s net income during the period at issue. The accounting items in the SEC charges, which Mr. Greenberg neither admits nor denies, represent less than 10% of the restatement AIG filed to justify the Greenberg firing demanded by Mr. Spitzer. The impact on retained earnings was roughly $250 million, when AIG’s total retained earnings at the time were approaching $70 billion.
So Larry concludes:
The bottom line: if Joe Cassano was the “man who crashed the world,” Spitzer was the guy who gave him the keys to the car. And all this for his supposed non-fraudulent responsibility for a barely material (if that) accounting mistake, plus, of course, the boost to Spitzer’s then career.
